By Gilbert Wong, Miranda Playfair, Margo White & Julianne Evans
Prasanna Gai, professor of macroeconomics at the University, has advised international banks on how to stress-test their banking systems, and reviewed monetary policy for our Reserve Bank. But, until now, he has never seen an economic crisis strike with such ferocity and speed.
Global GDP for the first quarter of 2020 dropped 20 percent. The World Trade Organisation expects global trading to contract by 33 percent, almost three times more than in the Global Financial Crisis (GFC) of 2009.
Prasanna does not dismiss comparisons to the Great Depression of the 1930s.
“This crisis is unusual in that it began with a problem in China and got magnified, quite deliberately, as a result of government lockdown policies. The global economic downturn that has unfolded hasn’t emanated from private choices, but as a result of governments choosing to lock down economies so health systems can cope.”
The scale of economic loss is unparalleled. The world’s major economy, the United States, is estimated to be bleeding $137 billion a month or more, while New Zealand’s loss in GDP equates to a downturn of $2 billion to $5 billion a month. Faced with unprecedented contraction of economic activity, Prasanna believes the Government has little choice but to continue to intervene using fiscal policy as a stimulus.
“Packages in the form of wage subsidies, tax deferrals, state loans or grants for firms must be large enough to be credible. Businesses and households must be convinced that their future prospects are good,” he says. “The Government did attempt to tackle this in the Budget in May.”
But lack of confidence in the future can become a self-fulfilling prophecy and lead to a ‘doom loop’. As worried consumers spend less, business cuts back on investment, and productivity reduces further. The result is a negative feedback loop that amplifies the initial economic shock created by Covid-19.
“The onus must also be on the Government to provide a ‘lender of last resort’ facility. It chose to prioritise health, or short-term health, over the long-term consequences of the economy, with the view that they could sort out the economy later.”
If that sounds grim, there are positives. New Zealand’s sound economic fundamentals lessen the risk of a ‘doom loop’. If the Government has to become the lender of last resort to kick-start the economy, it does so knowing that there is ‘fiscal space’. Historically low interest rates suggest high levels of public debt are sustainable, reducing the cost to future generations.
New Zealand’s lifeblood comes from international trade, with the major sectors dairy and tourism. That lifeblood relies on supply chains, the circulatory system of global trade. Although many supply chains have shuddered, just as many have rebounded. Our apples, milk and meat continue to find ready buyers in overseas markets. High-quality food will remain a strong part of New Zealand’s future.
Prasanna says Covid-19 revealed the world’s over-reliance on suppliers located in China. Around 300 of the world’s top 500 companies have facilities at ground zero, Wuhan. The lesson, he says, is that ‘just-in-time’ supply chains do not work in a crisis. The New Zealand economy also needs to diversify its supplier base, as a hedge against likely Covid-19 repercussions in countries we trade with, and build more robust supply chains.
Professor Tava Olsen, director of the Centre for Supply Chain Management at the Business School, says New Zealand needs to audit its stockpiles of essential items. The pandemic proved it was not enough to have agreements for supply when essential items faced global demand from countries with deeper pockets.
“Let’s ensure we are well prepared for any future emergencies. We’re living through a pandemic, but what about other scenarios, like war? What would we need if our borders were shut to goods as well as people? Are we self-sufficient enough?” she asks.
New Zealanders may never lack for food, but Tava says fuel reserves need serious review. “There should be larger reserves in Auckland. With oil so cheap, it’s a great time to rethink our fuel supplies.”
Her concern is for the myriad small to large manufacturers who had to shut up shop. They need to restart and be supported to restore a local manufacturing base. “After all, we won’t be earning tourism dollars for a long time.”
Colleague Dr Peter Zamborsky researches and teaches business strategy in the Faculty of Business. He says the lesson from Covid-19 is that New Zealand businesses need to master three core capabilities, the first of which is to refuse to duck uncertainty and instead to confront it.
“Don’t be paralysed by unpredictability.”
He recommends building at least four scenarios for different time horizons. Forget five-year plans and instead set up a ‘plan ahead’ team to focus on the long term. Be agile, move fast.
Second, settle on ways to drive the market.
“The most important of the strategic initiatives are the ‘no-regret’ moves that benefit the company in any scenario. This might mean initiating e-commerce and digital products, as consumer behaviour shifts to reshape the ‘at-home economy’.”
Finally, he says, businesses need to be prepared to transform to match what can be predicted about their sector.
“Many companies have had to retrench or restructure, such as Air New Zealand, where new CEO Greg Foran made it clear the company would emerge from the crisis as a domestically focused airline with a strong international cargo component.”
Like many, he hopes that economic stimulus packages from governments across the world will reduce the risk of global recession over multiple years. As Covid-19 reshapes business and trade, there will be new winners and losers. Some trends, such as the rise of digital giants from Google to Alibaba, will continue. Other possibilities, he says, are a time of bigger government, a more frugal economy and the decline or rethinking of global supply chains in a downshifted global economy.
This article was originally published in the Winter 2020 edition of Ingenio as part of a three-piece series looking at the impact of COVID-19 on New Zealand. For the original click here.